September started off on a solid note for the shipping industry, which was under stress over the last few years on macroeconomic headwinds and declining rates. The industry is bouncing back strongly with rising freight rates on the back growing shipments and a slowdown in new ship construction.
This is especially true given the rally in the Baltic Dry Shipping Index, which is a measure of the costs to ship raw materials by sea. The index jumped to a four year high, climbing over 45% over the past one month.
Improving Fundamentals
China, the world’s largest shipmaker by tonnage, has seen nearly 156% year-over-year increase in new ship orders in the first seven months of this year.
This is because rising steel production and prices are attracting iron ore (a major component of steel) purchases by Chinese steel mills, leading to growing demand for shipping vessels. Iron ore imports in China grew 11% in August, followed by 17% in July (read: Time to Bet on the Steel ETF).
The price of steel is likely to rise given the lack of Fed tapering, as commodities could see a boost in this environment.
Further, commodities such as corn and soybeans recently saw increase in prices. As a result, exports for these commodities through ship vessels would climb to record levels by the end of the year, according to the projection by the US Department of Agriculture.
Overall, the increase in shipments of iron ore, coal, grains, minerals, soybean and corn would raise freight rates across the globe, greatly benefiting the shipping industry as a whole.
ETF Angle
In such a backdrop, the main ETF tracking the industry has performed extremely well this year. The Guggenheim Shipping ETF (NYSEARCA:SEA) gained nearly 6.5% in the past one month and delivered outsized returns of over 24% in the year-to-date time frame. This return clearly outpaced the broad market fund, SPY, and other products in the industrial space by a wide margin.
We think the SEA could be poised for a further surge in the coming months, based on both technical and fundamental factors described below:
Technical Look
The fund currently made its new high of $19.90 and its short-term moving averages have managed to stay above long-term levels. The 9-Day SMA is now comfortably above the longer-term 200-Day SMA, suggesting continued bullishness for this ETF.
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